Prices and Profits: Who Watches

Which, and How do they Relate?

Chuck WaterfieldSPTF Conference

PanamaJune 2013

Promoting Transparent Pricing in the Microfinance Industry

Prices or Profits?• Fair prices and Fair Profits… which drives which?• Can you have fair prices and unfair profits? Or

unfair prices and fair profits?• Which aspect do clients and MFIs focus on?• Which should we focus on when determining

responsible practice?

Double Bottom Line –There is a balance between business and client

Client

MFI

Ideally, we seek a “win-win” in which both the client and the MFI benefit

Double Bottom Line –There is a balance between business and client

Client

MFI

Ideally, we seek a “win-win” in which both the client and the MFI benefit

Affordable PRICE

Adequate PROFIT

Double Bottom Line –There is a balance between business and client

Client

MFI

Ideally, we seek a “win-win” in which both the client and the MFI benefit

Affordable PRICE

Adequate PROFIT

Price

Costs

Double Bottom Line –There is a balance between business and client

Client

MFI

Ideally, we seek a “win-win” in which both the client and the MFI benefit

Affordable PRICE

Adequate PROFIT

Price

Costs

In Microfinance, neither of these are easy to

understand! The depend on the PRODUCT

Pric

e

Product

Market Conditions and Profit Sources

Pric

e

Product

Identical

Tran

spar

ent

Market Conditions and Profit Sources

Pric

e

Product

Identical

Tran

spar

ent

Efficiency & Competition

Market Conditions and Profit Sources

Pric

e

Product

Identical

Tran

spar

ent

Textbook FictionEfficiency & Competition

Market Conditions and Profit Sources

Pric

e

Product

Identical

Tran

spar

ent

Hid

den

Textbook FictionEfficiency & Competition

Market Conditions and Profit Sources

Pric

e

Product

Identical

Tran

spar

ent

Hid

den

Textbook FictionEfficiency & Competition

Deception

Market Conditions and Profit Sources

Pric

e

Product

Identical

Tran

spar

ent

Hid

den

Textbook Fiction

Smoke & Mirrors

Efficiency & Competition

Deception

Market Conditions and Profit Sources

Pric

e

Product

Identical Different

Tran

spar

ent

Hid

den

Textbook Fiction

Smoke & Mirrors

Efficiency & Competition

Deception

Market Conditions and Profit Sources

Cost and Price of a $300 loan is very different than

for a $1000 loan

High Prices do not necessarily mean High Profits

Pric

e

Product

Identical Different

Tran

spar

ent

Hid

den

Textbook Fiction

Controlled Confusion

Smoke & Mirrors

Efficiency & Competition

Efficiency & Confusion

Deception

Market Conditions and Profit Sources

Pric

e

Product

Identical Different

Tran

spar

ent

Hid

den

Textbook Fiction

Controlled Confusion

Smoke & Mirrors

Efficiency & Competition

Efficiency & Confusion

Deception

Market Conditions and Profit Sources

Typical Price Curve from MFT

Pric

e

Product

Identical Different

Tran

spar

ent

Hid

den

Textbook Fiction

Controlled Confusion

Smoke & Mirrors

Chaos

Efficiency & Competition

Efficiency & Confusion

Deception Mass confusion

Market Conditions and Profit Sources

Pric

e

Product

Identical Different

Tran

spar

ent

Hid

den

Textbook Fiction

Controlled Confusion

Smoke & Mirrors

Chaos

Efficiency & Competition

Efficiency & Confusion

Deception Mass confusion

REALITY

Market Conditions and Profit Sources

Pric

e

Product

Identical Different

Tran

spar

ent

Hid

den

Textbook Fiction

Controlled Confusion

Smoke & Mirrors

Chaos

Efficiency & Competition

Efficiency & Confusion

Deception Mass confusion

REALITY

OPTIMAL

GOAL

Market Conditions and Profit Sources

Double Bottom Line –There is a balance between business and client

Client

MFI

Affordable PRICE

Adequate PROFIT

Transparent Pricing

Responsible Profit Targets

MFI’s Costs

Defining a Responsible Price

+ MFI’s Choice of Profit

MFI’s Costs

Defining a Responsible Price

= Price Set by the MFI

+ MFI’s Choice of Profit

MFI’s Costs

Defining a Responsible Price

What Price Can the Poor Afford?

= Price Set by the MFI

+ MFI’s Choice of Profit

MFI’s Costs

Defining a Responsible Price

Moving Forward• Transparent Pricing• Insist on transparent pricing of all responsible MFIs• Urge regulators to require transparent pricing of all

lenders• Continue to study and learn from true prices

• Responsible Profit Targets• Determine thresholds for responsible profit• Make the system simple, requiring little more than

financial statements• Use as an initial hurdle for additional certification of

responsible practice

Promoting Transparent Pricing in the Microfinance Industry

MicroFinance Transparency is an NGO registered in the USA